1. (C) Summary. PM Berlusconi specifically requested thismeeting, and a spring address to a joint session of Congress,to bolster his prospects in Italy's April elections. Behindin the polls and facing his toughest campaign, Berlusconiwill juxtapose his proactive and pro-U.S.foreign policy withthat of his likely center-left opponent, Romano Prodi, whoprefers to follow an EU foreign policy lead and has calledfor a timetable to withdraw Italian troops from Iraq. GOIofficials are concerned about a potential terrorist attack,either during the Turin Winter Olympics or the springelections.

3. (C) PM Silvio Berlusconi prides himself on his warmrelationship with the President and has carefully plannedthis meeting and a spring address to a joint session ofCongress (he meets Speaker Hastert before going to the WhiteHouse) to bolster his prospects in Italy's nationalelections, tentatively scheduled for April 9. Berlusconi'scenter-right coalition is down eight points in the polls,undermined by internal leadership spats and continuedeconomic stagnation. The center-left also is plagued byinternal disputes but former European Commission PresidentRomano Prodi just won a triumphant electoral victory in theprimaries. Pending electoral law changes may slightlyincrease the odds for the center-right, and it is too earlyto deal Berlusconi out. However, most political observerspredict Prodi's center-left coalition will win in April.

Iraq: Seeking a Way Forward---------------------------

4. (C) We expect Berlusconi will juxtapose his proactive,pro-U.S. foreign policy with that of Prodi, who prefers tofollow an EU foreign policy lead and has publicly called fora timetable to withdraw Italian troops from Iraq. Berlusconihas remained adamant that Italian troops will stay in Iraquntil the security situation warrants, and the Iraqigovernment requests, a drawdown of Italian troops. Thecenter-right has already accused Prodi of encouragingterrorist attacks on Italy through reckless calls forwithdrawal. However, Italian public opinion remainsoverwhelmingly opposed to the war in Iraq and Berlusconi willbe under increasing pressure to make public statements aboutplans to withdraw troops. He will be reassured bycommitments of continued high-level consultations but wouldbetter appreciate progress in enhancing Iraqi securitycapabilities in a way that allows measured Italian drawdownsby April. Italy is also seeking an extension of the UN Iraqmandate by the end of the year; the Italian presence ispremised on the UN mandate, and Parliament will vote inJanuary on the next six-months of funding for thier troops.Italy also feels that the mandate extension shouldspecifically reference political progress in Iraq.

5. (C) We can and will work with a Prodi-led governmentshould the center-left win next year. Despite Prodi's callsfor a withdrawal timetable, other elements of his center-leftcoalition have assured us that Italy will not make anydramatic Zapatero-style actions and will coordinate changesin troop levels with both us and the Iraqi government. Prodihimself has hinted at a compromise formula involvingcontinued Italian involvement in Iraq for reconstructioninitiatives.

6. (C) Berlusconi will be seeking Presidential statementsof support on shared values for our freedom agenda and praisefor Italy's substantial commitment of resources overseas. Inaddition to being the third largest contributor of troops toMFN-I, Italy also funds reconstruction and justice projectsin Iraq, leads ISAF, a PRT and a justice initiative inAfghanistan, just took over KFOR command, pledged $3 millionto the UN Fund for Democracy, indicated it will fund the newFoundation for the Future, co-hosts Democracy AssistanceDialogue initiatives with Turkey and Yemen, and providedearthquake and hurricane relief for Pakistan and New Orleans.We want to provide appropriate praise without jeopardizing apotential future relationship with a center-left government.

Budget Woes-----------7. (C) High public debt, rising social welfare costs and astagnant economy are limiting Berlusconi's ability tomaneuver in the face of growing domestic economic discontent.Pocketbook issues will drive the campaign and beBerlusconi's biggest challenge, although Prodi has yet tooffer any credible alternative economic policy. The draftbudget now being debated by the Italian Parliament must beapproved by the end of the year, and it appears it willinclude painful cuts in many sectors. This includespotentially dramatic (to about .85% of GDP) cuts in thedefense budget and a 20% reduction in the overseas deploymentbudget that could undermined Italy's ability to sustain itsoverseas commitments.

Terrorist Threat Looms Large----------------------------

8. (C) Following the London bombings, the GOI approved astrong anti-terrorism law and began a crackdown of arrestsand deportations of illegal immigrants and suspectedterrorists. However, Italy continues to be targeted infundamentalist websites, and many Italian officials expectItaly will be attacked in the near future. They are worriedspecifically about a potential attack during either theFebruary Turin Olympics or the spring elections. We continueto work closely with the GOI on security preparations andintelligence sharing for the Olympics as well as onincreasing readiness for possible attacks on USG facilitiesor London/Madrid scenarios.

UN Reform/Iran/Russia/Balkans-----------------------------

9. (C) Berlusconi is likely to thank you for U.S. supportin opposing the G-4 plan for UNSC reform; while Italy'sspecific concern is blocking Germany from obtaining a seat,they support our view that any changes to the SecurityCouncil should be based on a wide consensus of support withinthe UN. As Iran's largest European trading partner, Italyremains concerned that it has been excluded from the EU-3negotiations and complains that the EU-3 has not sufficientlyconsulted other EU member states. Italy shares our concernabout proliferation and supports moving the issue to theUNSC. Overall, however, Italy favors engagement overconfrontation and will be concerned about the economic lossesassociated with potential sanctions. Berlusconi and Putinremain good friends, and Berlusconi continues to insist hehas delivered our messages of concern about Putin'sincreasingly anti-democratic actions. Another nudge from thePresident would strengthen our message. Italy remains fullyengaged on the Balkans and supports a continued internationalpresence in Bosnia and Kosovo until there is internationalconsensus that both entities have made sufficient progress ondemocratic reforms. The candidacy of Amb. Laura Mirachianfor the post of the High Representative in Bosnia is of keyinterest to the Italians. They have lobbied strongly for USGsupport, arguing that Italy's high military profile deservesan equally strong policy voice. Department and Embassyofficers who have met with Mirachian believe she shares ouroutlook for the future of the region. While she has notreceived official USG support at this point, the USG does notwant to be seen as opposing her candidacy, since she couldemerge as the front-runner.

Visa Waiver Program-------------------

10. (SBU) DHS has confirmed that there will be no blanketwaiver, no official policy favoring parole, and no exceptionsto the October 26, 2005 requirement for digitized photos inpassports for any beneficiary of the Visa Waiver Program(VWP). The GOI plans to issue machine readable passportswith digitized photographs in five Italian Prefectures: Rome,Milan, Naples, Palermo and Cagliari, with the possibility ofsuccessive extension to other Prefectures. Italians whoobtain passports after October 26 from Prefectures other thanthese five offices, or who obtain passports from an ItalianConsulate abroad, will require a U.S. visa. U.S. consularsections in Italy are working with airlines and travelagencies to ensure that Italian passengers caught unaware ofthe change in visa requirements are directed to the closestEmbassy or Consulate for expeditious visa processing.

11. (C) President Ciampi, FM Fini and senior aides to PMBerlusconi have all raised the VWP issue with the Ambassador,insisting that the new requirements will be a majorembarrassment to Berlusconi just when he is trying to use hisU.S. connections to improve his election prospects.Berlusconi may ask the President to intervene to fix theproblem, arguing that Italy is a staunch partner in the waron terror and is in the process of implementing previouslyannounced U.S. requirements for biometric passports.SPOGLI